Legislature(2011 - 2012)SENATE FINANCE 532
02/24/2011 02:30 PM Senate FINANCE
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| Presentation on the Goose Creek Correction Center by the Department of Corrections |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
February 24, 2011
2:33 p.m.
2:33:38 PM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 2:33 p.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Lesil McGuire, Vice-Chair
Senator Johnny Ellis
Senator Dennis Egan
Senator Donny Olson
Senator Joe Thomas
MEMBERS ABSENT
None.
ALSO PRESENT
Joseph Schmidt, Commissioner, Department of Corrections;
Jeff Stark, Attorney, Department of Law; Kevin Worley,
Internal Auditor, Department of Corrections; Leslie
Houston, Director of Division of Administrative Services,
Department of Corrections; Deven Mitchell, Debt Manager,
State Investment Officer, Department of Revenue.
PRESENT VIA TELECONFERENCE
Ted Leonard, Executive Director, Alaska Industrial
Development and Export Authority; Brian Bjorkquist, Senior
Attorney General, Department of Law.
SUMMARY
^Presentation on the Goose Creek Correction Center by the
Department of Corrections
2:35:49 PM
Co-Chair Stedman informed the committee that the department
had been requested to relay the history of the project,
discuss the original Senate bill that created the endeavor,
and lay out the objectives of the facility. He hoped to
examine the process of the project in order to identify
which objectives had, or had not, been met. He expected the
department to present the anticipated impact of the prison
on the operating budget. He remarked that the Goose Creek
facility was a large capital budget project with many
economic factors. He felt that background information
concerning the project would be necessary for a full
understanding of the endeavor.
2:37:53 PM
JOSEPH SCHMIDT, COMMISSIONER, DEPARTMENT OF CORRECTIONS,
presented a PowerPoint presentation: "Department of
Corrections Presentation on Goose Creek Correctional
Center" (copy on file). He stated that the Goose Creek
Correctional Center (GCCC) project began in 2003. He
displayed Slide 2 (an aerial view of the prison, from
August, 2010), and stated that the perimeter of the
facility was to be much like the maximum-security prison in
Seward. He shared that the prison was expected to function
like a "city within a city," and that the facility was
designed under the expectation that the prisoners would be
responsible for the various aspects of daily life. He
offered that allowing the prisoner to function as a
normalized member of the prison community would help to
lower prisoner recidivism rates.
2:39:35 PM
Commissioner Schmidt discussed Slide 3, "Goose Creek at a
Glance":
· Consist of five buildings with 435,000 square feet
on 150 acres.
· Maximumimum security-like perimeter.
· Provide 1,536 beds for medium security sentenced
inmates.
· 1,280 General Housing
· 128 Special Management Unit
· 56 Administrative Segregation
· 56 Punitive Segregation
· 16 Medical Segregation
· Employ a staff up to 345.
· Inmates participate in the everyday responsibilities
and operations of the facility (mail, kitchen,
laundry, etc.).
· On site medical clinic.
He stated that the higher-cost 56 Punitive Segregation
beds had been positioned in the center of the compound in
order to aid in the event of an overflow on pre-trial
housing needs. He explained that prisoners navigating the
pre-trial process tended to be more hostile and would
benefit from the isolated housing environment. An on-site
medical clinic would be present on the grounds, as well a
hospital unit. The intent was to handle as much medical
business as possible in-house.
2:41:35 PM
Commissioner Schmidt displayed Slide 4, "Opening of Goose
Creek Correctional Center.":
· Ready for occupancy March, 2012….the last four
months of FY 2012.
· Open with approximately 30 selected prisoners, small
staff contingent.
· Prisoners will move from mod-to-mod testing
electronic systems, intercoms, doors, run kitchen,
laundry.
· Full ramp-up will begin July 1, 2012 - September 30,
2013 (FY13 - FY14). Transfer of prisoners and staff
recruitment and training paced over 15 months.
· Experienced department staff will have an
opportunity to transfer to Goose Creek Correctional
Center (GCCC) when it opens.
· Staff will be recruited and hired to backfill
vacancies. Hiring will occur at institutions
throughout the state.
He stated that the average growth of the prison population
would fluctuate, and that the opening plan would need to be
modified accordingly. He noted that hiring the 345
employees would be a challenge, but that the recruitment
and training programs were strong and would be a sufficient
resource to draw from for hiring purposes.
2:43:26 PM
Senator Ellis probed the deeper impact of the GCCC on the
staff of already existing facilities. He expressed concern
for the safety and security of the already thinly-staffed
facilities. Commissioner Schmidt replied that in a 2010
survey, 67 corrections officers (or one-third of the
correctional workforce) in the state had expressed interest
in transferring to GCCC. He relayed that the backfill
consisted of people from primarily Anchorage and Seward. He
said that the staffing issue was one of the reasons for the
slow ramp-up to the opening of the facility. He admitted
that the issue was a substantial challenge.
Senator Ellis wondered whether a delay in opening GCCC
would require revisiting the backfill procedure.
Commissioner Schmidt replied "absolutely." He stated that
staff would not be hired until the facility was officially
open.
2:46:50 PM
Commissioner Schmidt said that the department had held in-
depth discussions concerning staffing costs. During the
development of the staffing model, prisoner classifications
had been examined. In the state, prisoners are classified
as minimum/medium and closed/maximum. The department
studied the per day costs of the minimum/medium facility in
Palmer, and then a closed/maximum facility in Seward, to
determine the per day operating cost for GCCC. He felt that
the cost would fall between the Palmer and Seward
facilities, recognizing a slight increase for the on-site
medical offerings. Palmer Correctional Center costs $68.52
cents per day to operate; Spring Creek in Seward runs
$104.00. Goose Creek was expected to cost $86.72 to run per
day.
2:48:47 PM
Commissioner Schmidt discussed Slide 6, "Annual Average
Daily Inmate Population." The graph reflected the projected
daily inmate population for 2012 consisting of 1,050
inmates out-of-state, and 3,895 in-state. The increased in-
state number reflected the additional 64 beds being built
in Kenai. He pointed out that the population dipped in 2008
to 2009, but that the increased projection for 2012 seemed
realistic.
2:49:56 PM
Commissioner Schmidt displayed Slide 7, "Projected Inmate
Populations for 2013-2014." The slide presented a quarter-
by-quarter breakdown of FY 13 and FY 14. On July 1, 2013,
the first staff members would be moved to the facility,
hiring processes would be in action, and training academies
would be running. Presented was a difference of 220 out-of-
state inmates between the first and second quarters, which
reflected the amount of inmates that could be flown out-of-
state in two airplane loads. Ideally by the first quarter
of FY 14, the facility should be at full capacity and fully
operational. The first budget request encompassing an
entire year would be made for FY 14.
2:50:49 PM
Co-Chair Hoffman pointed out to the committee that of the
1,536 beds, 1,050 were expected to be filled by out-of-
state inmates. He wondered where the other nearly 500
inmates would be pulled from. He queried the plans for
improvements to the other facilities named in the original
SB 65, specifically in Kodiak, Dillingham, Yukon/Kuskoquim,
and Spring Creek in Seward. Commissioner Schmidt replied
that prisoners would be drawn from facilities that were
currently over-capacity. He admitted that the facility in
Bethel presented challenges due to accessibility and
transportation issues.
Commissioner Schmidt stated that when SB 65 was passed, the
site at Goose Creek had already been chosen and that the
City of Bethel had been supportive of the project. At that
time the department examined the size and cost of the
project and made comparison with the needs of the prison
population throughout the state. After examination the
project was downsized from 2,250 to 1,536 beds. It was
determined that the facility in Seward would have adequate
space for the closed/maximum prisoners if the
minimum/medium population was moved to a different or new
facility.
Commissioner Schmidt stated that another reason for
downsizing the project was to broaden the reach of the
resources. He said Bethel had been considered for a 120 bed
expansion, but that a change in city council had led to
termination of the plan. He stated that the city council
had alternated its stance on support of the resolution
right up to the July 1, 2009 deadline that had been written
into Section 5 of SB 65. He offered that the department had
been interested from the beginning in the Bethel expansion,
knowing the overcrowding issues faced by the facility
there. The department was currently focused on GCCC, but
was anticipating the future needs of facilities in both
Fairbanks and Bethel.
Co-Chair Hoffman queried the timeframe for improvements to
the Bethel facility. He revealed that he had met with
department staff and had acquired documents that reflected
that the expected completion date of a Bethel facility was
2015, with the first requests for funding in 2012 for
$16,681,000.
Co-Chair Stedman pointed out to the committee that the
$16,681,000 for the Bethel project was not listed in the
budget.
Senator Hoffman agreed that the funding was not listed in
the budget, but had been listed on the Capital Project
Submission and Information System (CAPSIS).
Commissioner Schmidt replied that he understood that there
was great need for expansion in Bethel and that the
community had been close to supporting further expansion.
He said that the department had not been able to reconcile
all of the issues raised by the community in Bethel. He
reiterated that the facility was overbooked and in need of
expansion.
Co-Chair Hoffman reminded the committee that there was
documentation from the department that illustrated the
preliminary plan; the cost would be $143 million for a
completed 80-bed facility in Bethel. Also documented was
the need in Fairbanks to establish a 152-bed facility by
2016, and another 200 beds by 2020. He queried the current
plans for the two facilities. Commissioner Schmidt replied
that the department would need to revisit those projects
during the interim. Presently, the main focus for the
department was the opening of the facility at Goose Creek.
Co-Chair Hoffman reasoned that the projects should be
underway if the plans had been developed to meet the needs
in the two facilities. He noted that often many schools
were built simultaneously in the state and hoped that the
department was capable of building more than one prison at
a time. Commissioner Schmidt responded that the department
was capable of building two prisons at a time, but that
GCCC was the focus at present.
Co-Chair Hoffman asserted that in discussions over the last
three years, DOC had given assurances that the needs in
Fairbanks and Bethel would be met. He pressed for a
timeline for the projects to be completed. Commissioner
Schmidt restated that the project lost inertia when the
community of Bethel voted not to support it.
2:58:24 PM
Co-Chair Hoffman stated that SB 65 had expired, but the
needs highlighted in the legislation had not. He opined
that the interest of the department, not the needs at the
Bethel facility, had expired. Commissioner Schmidt replied
that the department was still aware of the needs at the
facility in Bethel.
2:59:27 PM
Senator Olson wondered how the issue of overcrowding might
be remedied. He felt that the department was taking a
narrow view of the future by concentrating all of its time
and resources on one prison. Commissioner Schmidt replied
that the department recognized that the prison population
in Bethel was growing, but that there was only so much
money that the DOC could request. He said that bringing
prisoners home was the priority. He relayed that $22
million was being spent on out-of-state prisoners each
year. He asserted that the department's main focus had been
on better reintegration of prisoners after release, in
order to lower recidivism rates.
3:01:34 PM
Co-Chair Stedman requested that the department lead a
broader discussion of SB 65.
LESLIE HOUSTON, DIRECTOR OF DIVISION OF ADMINISTRATIVE
SERVICES, DEPARTMENT OF CORRECTIONS, discussed Slides 8
through 10: "History of Goose Creek Correctional Center":
February 2003 - SB 65 was introduced.
•This bill was introduced as a financing mechanism to
expand correctional facilities within the state.
•Mandated local governments to bond for construction
of a prison.
•Fairbanks 80 bed expansion
•Bethel 120 bed expansion
•Seward 144 bed expansion
•Unidentified Region, 1200-2251 bed facility (Mat-Su
selected, Goose Creek site selected)
•Kodiak Community Jail, 6 bed expansion
•Dillingham Community Jail, 17 bed expansion
•May 2004 - SB 65 passed unanimously.
•July 2004 - Memorandum of Understanding between Mat-
Su Borough, Alaska Housing Finance Corp. (AHFC), and
Department of Corrections (DOC) with the agreement to
develop the prison in the Mat-Su Borough.
Ms. Houston stated that a recent engineering study had
shown that the facility at Fairbanks should be completely
replaced rather than expanded. She admitted that the
department was behind on the expansion of the Bethel
facility, but that it was "on the radar." The Seward
expansion had been determined to be unnecessary. It was
found that more minimum-security beds were needed and not
maximum-security. She shared that there had been land
transfer issues regarding the Seward expansion. The 6-bed
expansion in Kodiak had been completed on February 4, 2011.
The community of Kodiak had supplied a $2 million match to
see the project to completion. The state appropriated $2.1
million through the Department of Commerce, Community and
Economic Development (DCCED). The Department of Corrections
(DOR) was able to provide a $300,000 one-time item to the
community to keep the old facility running while the new
one was being built, this would be an $188,000 increment to
the base contract in FY 12. The expansion in Dillingham had
not been realized, but the department hoped to reestablish
a relationship with the community.
3:05:27 PM
Co-Chair Hoffman contended that SB 65 had not been a
proposal, but a piece of legislation that had been passed.
He argued that since the passage of the legislation, no
progress had been made, and that the facilities listed were
in the same condition in 2011 as they were in 2003. He
suggested a lack of leadership from the administration in
addressing the problem.
Co-Chair Stedman highlighted the fact that there were
locations written into the legislation that had yet to be
addressed. He pointed out to the committee that the
original bill had set the inflation adjusted total bed cost
limit at $135,000 for Mat-Su, Fairbanks, Anchorage, and
Seward. He wondered where the department was to-date,
concerning the intent of the original legislation.
Commissioner Schmidt replied that the figure had been
$135,000, plus inflation. He said that the Department of
Law had given DOC permission to use construction inflation,
as at the time construction inflation was outpacing the
Consumer Price Index (CPI).
Co-Chair Stedman requested that documentation of the use of
construction inflation be submitted to the committee. He
cited Page 3, Line 14 of SB 65:
(1) the average capital cost for all beds may not
exceed $135,000 a bed for (a)(1), (2), (4), and (5) of
this section and $155,000 a bed for (a)(3) of this
section, adjusted for inflation each year at a rate
equal to the percentage increase in the Consumer Price
Index for urban wage earners and clerical workers for
Anchorage, Alaska, during the previous calendar year
as determined by the Bureau of Labor Statistics,
United States Department of Labor;
Co-Chair Stedman felt that the language was quite specific
in its intent. Commissioner Schmidt assured the committee
that the documentation of the numbers would be provided at
a later date.
Co-Chair Stedman wondered how the committee should
reconcile the capital construction limits of the original
bill as being met, when only one of the listed projects had
been completed. Ms. Houston stated that the cost per bed
outlined in the bill had been exceeded.
3:10:12 PM
Co-Chair Hoffman stated that he believed that DOC broke the
law. Ms. Houston stated that the economy changed from the
time that the bill was passed to the time that ground had
been broken at Goose Creek.
Co-Chair Hoffman offered that perhaps the department had
followed a subsequent law that had changed the per bed
figure. Ms. Houston rebutted that the department had done
everything possible to scale back the project. She added
that when the bonds for the project were issued in 2008 the
economy was severely struggling.
3:11:44 PM
Co-Chair Hoffman revealed that he was still waiting to hear
about the utility costs as laid out in SB 65.
Co-Chair Stedman said the annual lease payment set out in
SB 65 was 11,600 per bed. The original Goose Creek plan was
for 2,250 beds, with a lease cost of $15.3 million. He
questioned why the project now was at 1,536 beds, and the
lease cost had increased to $17.8 million. Ms. Houston
could not speak to the lease payments. She deferred the
question to the Department of Revenue (DOR) and the
Department of Law (DOL).
Co-Chair Stedman wondered if the downsizing of the project
was a result of the lease payment structure. Ms. Houston
replied that she did not know.
3:13:38 PM
Co-Chair Stedman asked if the department was comfortable
with the size of the Goose Creek facility. Commissioner
Schmidt felt the facility was the correct size.
3:14:29 PM
JEFF STARK, ATTORNEY, DEPARTMENT OF LAW, referred to the
issue of CPI versus construction inflation. He stated:
"I think there is a little bit of confusion in terms of
what we did and how we got to the number. I don't believe
it was actually construction CPI that we used because I
don't think there is any such number that's generated. What
we did look at, and what LAW did approve, was the issue of
whether that adjustment went through the date of
essentially signing the contract, or whether the adjustment
should continue throughout the entire construction
process."
Mr. Stark shared that he had carefully analyzed the
language of SB 65. He said that the construction CPI did
not use a different index and that it was a question of
what period of time was being used to measure it. The
department had used the period of time up through and
including construction. Estimates had been provided in
terms of how much of the construction would be completed in
each year and no adjustment had been made for work that had
already been completed.
3:16:41 PM
Co-Chair Stedman queried the Alaska Industrial Development
and Export Authority (AIDEA) financing vehicle for the
utilities. He wondered how the financing matched up with
keeping within the $11,600 per bed constraint. Mr. Stark
responded that the AIDEA financing was a complex
transaction. The loan was not being made to the state or to
DOC but to a private developer. He reminded the committee
that the facility at Goose Creek was being built by and was
owned by the Mat-Su Borough. The borough put out a request
for private developers to design, build, finance, and
operate the water and wastewater facility. The idea was
that the services provided to the facility could expand
into the broader community as the area developed, which
would spread the cost of development to all users in the
area. Valley Utilities LLC., the current developer,
retained the AIDEA loan and will repay the AIDEA loan in
its entirety. The DOC was expected to pay an operating fee
to Valley Utilities. The operating expense would
incorporate the debt service that Valley Utilities will
have to pay. He noted that this would be a one-user utility
and DOC would pay for the service until the area saw more
development.
3:19:21 PM
Co-Chair Stedman wondered if all the elements of SB 65 had
been implemented as originally intended. Mr. Stark believed
so. There were no lease payments or capital expenses that
were being made in excess due the water and wastewater
facilities. The expenses were operating expenses and would
not be considered a construction expense. Although the
operating expenses would be high for the first few years
the expense fit within the framework of the original bill.
3:20:11 PM
Co-Chair Stedman expressed discomfort that all the elements
of the original bill had been implemented. He hoped for
further review. Mr. Stark offered to explain how the
relationship between the water and wastewater utility and
the lease facility worked.
3:20:59 PM
Co-Chair Hoffman reiterated that he was a sponsor of SB 65,
and the original intent was that all the costs be
calculated under the per bed cost, and not to subsidize
additional sub-division costs. He asserted that if the
prison had not been built in the area, the utility would
have never existed. Mr. Stark agreed. He said that the
purpose for building the prison had not been to subsidize
other development in the area.
Co-Chair Hoffman understood that the intent had not been to
subsidize other development, but that that seemed to be the
current situation. He felt that there were nefarious
actions being taken to justify the financing of the
project. He stressed that the intent of SB 65 was that all
costs were to be related in order to justify the per bed
cost. Mr. Stark replied that in late 2008, DOC was
finalizing contracts with the state and the utilities had
been excluded from discussion at that time. He added that
construction of utilities was not normally part of the
construction cost for a prison facility. The facility would
usually hook up to whatever facilities were already
established. Had the prison been built in a more populated
area, the utility expense would have been alleviated.
Co-Chair Hoffman highlighted that the site for the project
was selected in an area where utilities were not available.
He argued that the facility should have been built closer
to available utilities. He voiced distain for the
"complicated financing mechanism" used to bring utilities
to the site.
Co-Chair Hoffman asked what portion of the utility costs at
Goose Creek could be directly attributed to the
construction of the facility. Mr. Stark replied that
replied that only DOC would presently be using the
utilities in the area. He furthered that it was expected
that within the next decade there would be more development
near the facility, which would result in more facilities
hooking up to the utilities. He did not offer full
confidence concerning the expectation of development in the
area.
Co-Chair Hoffman felt that the department had disregarded
the intent of the law; the building of the utilities should
have been part of the construction costs, or the facility
should have been built near existing utilities. Mr. Stark
reminded the committee that DOC was not building the
facility. The MatSu borough was building the facility.
Because of the way SB 65 was structured, it was not simply
a matter of DOC deciding where the prison should be built.
The decision of where to build had been largely driven by
the borough.
3:26:25 PM
Co-Chair Hoffman pointed out that DOC would have needed to
see the initial numbers and justify the cost under the
intent of the law. He asserted that it was not the Mat-Su
that was in charge of making that decision. Mr. Stark
replied that it was the responsibility of the Mat-Su
Borough to solve the utilities problem.
Co-Chair Hoffman contended that it was the responsibility
of the department to examine the financing mechanism in
order to ensure that the intent of the law was being
followed. Mr. Stark said that was correct. He recalled the
2008 decision to move forward with construction of the
prison, at that time DOC and the borough had been in
discussions about how to solve the utility problem. Because
they were a separate facility from the prison, it was
decided that the utilities should be excluded from the
discussion. The hope was that discussions would continue as
the project progressed.
Co-Chair Hoffman wondered what decision was made first:
-Build the facility and worry about the water and
sewer financing later.
-Work on the financing of the water and sewer and then
build the facility.
Mr. Stark replied that the decision to build the facility
had been made long before the water and sewer had been
considered.
Co-Chair Hoffman understood that lack of consideration for
water and sewer must have presented a problem once the
facility was built. Mr. Stark said yes. He maintained that
the department's actions had complied with the original
intent of SB 65.
Co-Chair Hoffman testified that as a co-sponsor of the
original bill the department had not honored the intent of
the legislation.
Mr. Stark stated that DOL had examined SB 65, and concluded
that the way that the deal was structured fit within the
language of the bill.
Co-Chair Stedman expressed concern that the financial
arrangement was questionable. He felt that it should have
been brought before the committee for consideration. He
believed that the utilities discussion should have been
brought before both finance committees, as those bodies
hold the appropriating power of the legislature, and
lamented having read about the "complicated financial
arrangement" in the newspaper. He agreed that some creative
financing may be legal, but that it was not good public
process when dealing with the treasury of the state.
3:30:40 PM
Senator McGuire echoed the comments of Co-Chair Hoffman.
She felt that the problem of regional balance should be
recognized. She shared that one of the goals of the
legislation had been to recognize that the prisoner
population in the state was growing, which forced the state
to send inmates out-of-state at an unsustainable cost. She
explained that the original SB 65 discussion had involved
where inmates were being transferred to and how facility
expansion and upgrades across the state should be
addressed. She expressed concern that the department had
not returned to the finance committee for approval of the
inflated cost of the project and that this had led to the
neglect of other regions of the state. She noted that
Bethel had been targeted for lowering domestic violence and
crimes against children, but that the prison there had been
operating over capacity since 2003. She concluded that the
intent of the legislature was not being carried out.
3:32:54 PM
Ms. Houston continued with Slide 8: "History of Goose Creek
Correctional Center."
•June 2006 - Site selection process began.
•With a plan to construct a 2,250 bed facility.
•800,000 square feet all under one roof.
•Capable of housing close/maximum prisoners.
•Public hearing and open houses were held.
•June 2007 - MOA with AHFC expires, effectively
removing AHFC from project involvement.
•June 2007 - The decision was made by DOC to downsize
GCCC to 1,536 beds and change the classification level
to medium security.
•To build a 2,250 bed facility was projected to
cost $490M.
•It would mitigate DOC's ability to spread
resources across the state.
•The largest prisoner population is medium
security.
Co-Chair Stedman asked why the decision had been made to
downsize the facility. Commissioner Schmidt replied that
the greatest need was among the medium-security prisoners,
and that building maximum-security prisons was more
expensive.
Co-Chair Hoffman requested a white page detailing the
sources of inflation factors for the $11,600 per bed
calculation which led debt services to raise the limit to
$17.8 million. Ms. Houston agreed to prepare a report.
3:35:37 PM
Ms. Houston detailed Slide 9: "History of Goose Creek
Correctional Center Continued…"
•February 2008 - Mat-Su Borough and DOC execute an MOU
to plan and finance a prison.
•June 2008 - Mat-Su Borough issues design/build
request for proposal (RFP) for the prison.
•August 2008 - Mat-Su Borough published request for
qualification (RFQ) to design, build, operate &
finance a water/waste water facility for GCCC.
•October 2008 - Deputy AG Tillery issues a legal
opinion that CPI for Construction Inflation can be
applied for services received during subsequent time
period; this does not violate SB65 per bed formula.
•December 2008 - DOC requests $20 Million for FY10
Capital Budget.
Co-Chair Stedman requested a copy of the October 2008
letter from Deputy Attorney General Craig Tillery. Ms.
Houston said a copy of the letter would be provided.
Co-Chair Hoffman thought a second opinion would be
necessary.
Co-Chair Stedman wondered what happened to the $20 million
the department had requested in the FY2010 Capital Budget.
Ms. Houston continued with Slide 10, "History of Goose
Creek Correctional Center Continued…":
•December 2008 - State of Alaska Lease Revenue Bonds
sold by Mat-Su Borough provided $240,073.2 to fund
GCCC.
•May 2009 - Mat-Su Borough publishes a RFP for a
contract to design, build, operate and finance the
water/waste water facility to support GCCC.
•July 2009 - DOC secures $6M appropriation in FY10
Capital Budget for utilities and infrastructure.
Ms. Houston replied that in July of 2009, $6 million of the
$20 million request was secured. The funding was for
utilities and infrastructure.
Co-Chair Stedman asked if the request had been reduced by
the administration before submission to the Capital Budget
on December 15. Ms. Houston replied in the affirmative.
Co-Chair Stedman understood that the request had been
submitted to the governor for consideration to be included
in the FY2008 budget, and $6 million was put forward in the
Capital Budget. Ms. Houston replied that a multi-year
appropriation had been submitted showing $6 million in
FY2010, $9.5 million in FY2011, and $4.5 million in FY2012.
The department received the $6 million and did not come
back to the legislature the subsequent fiscal years.
3:38:23 PM
Co-Chair Hoffman wondered why the additional $13 million
had not been requested. Ms. Houston believed that the
project had been at a point where the $6 million had not
been entirely allocated. The department examined the
various utility infrastructure and road improvements that
needed to be made and chose not to return to the
legislature at that point in time.
Co-Chair Hoffman asked it was at that point when "creative
financing" took over. Ms. Houston replied that the
department had simply made an effort to expend the $6
million that had been appropriated for the fiscal year.
Senator McGuire asked if Valley Utilities was regulated by
the Regulatory Commission of Alaska (RCA).
3:39:35 PM
Mr. Stark responded that the RCA would gain jurisdiction
over the utilities once 10 customers were online.
Co-Chair Stedman understood that RCA jurisdiction would be
automatic once the 10 customers were online. Mr. Stark
responded yes. He corrected that it could be 5 customers
and not 10. He said he would check the number. At the point
that the determined amount of customers were on line,
Valley Utilities would be required to obtain a certificate
from the RCA, who would ultimately govern the utility
rates.
Co-Chair Stedman asked if the utility line had been
constructed in a manner for easy connection. Mr. Stark
replied in the affirmative.
Co-Chair Stedman requested data regarding how the utility
line was engineered for expansion. Mr. Stark reiterated
that the situation was complex.
Co-Chair Stedman countered that the committee could handle
the complexity. Mr. Stark stated that the water treatment
system had been incorporated as part of the actual prison.
The boundary lines for the prison under the lease purchase
agreement were altered for the incorporation, and funds
from the $240 million bond issue were being used. The
wastewater facility could someday become a public utility.
3:42:01 PM
Co-Chair Stedman requested the sizing of the water and
wastewater treatment facilities, relative to the size of
the GCCC. Mr. Stark agreed to provide that information.
Co-Chair Stedman requested information concerning the size
of the lines that were being put in the ground for the
water and sewer.
3:43:12 PM
Co-Chair Hoffman asked if the department had approached RCA
concerning the one customer use of the utility, and if the
commission had agreed that approval did not have to go
before them. He also asked if the department had informed
the commission that the utility would eventually be
servicing additional customers. Mr. Stark replied no. He
offered that the requirements could be found in statute.
Co-Chair Hoffman wondered why no one had been in talks with
the RCA. Mr. Stark reiterated that the statute was clear in
terms of when the RCAs jurisdiction was invoked.
Co-Chair Hoffman queried if the RCA would agree with Mr.
Starks opinion. Mr. Stark countered that he had assurances
from RCA attorneys.
Co-Chair Hoffman asked if the agreement had been documented
in writing. Mr. Stark replied no.
3:44:45 PM
Ms. Houston continued with slide 10: "History of Goose
Creek Correctional Center Continued.":
•March 2010 - Valley Utility proposes to finance the
water/waste water facility using tax exempt private
activity bonds issued by the Mat-Su Borough.
•April 2010 - The State of Alaska Department of
Revenue expresses concern about issuing state
supported debt that exceeds the authority of SB65.
Co-Chair Hoffman asked if the concern by DOR had been
issued in writing. Ms. Houston replied yes.
Co-Chair Hoffman requested copies of the document.
Co-Chair Stedman requested further explanation of the lease
revenue bonds, particularly, the yield on the bonds and the
potential cost fallback against the state. He asked that
any action taken to lower the cost to the state be further
explained to the committee.
DEVEN MITCHELL, DEBT MANAGER, STATE INVESTMENT OFFICER,
DEPARTMENT OF REVENUE, thought that SB 65 had been the
result of the state being in a weak financial position and
the desire to provide for infrastructure. The Department of
Revenue had been reluctant at the time to support credit
being used as a means of providing for funding for
correctional facilities. The alternative means of funding
in SB 65, community bonding, was viewed by DOR as a way to
reach the goal of building new correctional facilities. He
stated that in the end, the Mat-Su project provided the
most workable plan. Fairbanks could not issue revenue bonds
without a vote. Also, the prison was in the city and the
borough was given the authority to issue the debt. He
stated that he travelled to Bethel and explained to the
community that the state would be paying the debt service
and would be liable concerning obligation issues. He said
that the Bethel City Council had been uncomfortable with
the explanation and had been unwilling to move forward with
the financing. He relayed that legal issues relating to the
original financing, land control, and a collocated
wastewater facility at Spring Creek had proved immovable
hurdles in Seward. Location issues arose in Mat-Su due to
Mat-Su borough assembly requirements. The bonds for the
Mat-Su project were sold in late 2008.
Mr. Mitchell believed that the delay from 2004 to 2008 had
been related to DOR's reluctance to participate in the
transaction during the Murkowski Administration. He added
that the department had initially issued a veto
recommendation for SB 65. The department changed position
with shift from the Murkowski to the Palin Administration.
In late 2007 a design project was developed but the
department was not in a position to sell the debt until
late 2008. He remarked that interest rates were very high
when the transaction occurred, and rates were met to pay
the lease. The department was unable to sell the bonds in
December 2008 and failed to meet the target of 17.8 million
identified in the bill. At that time, the $135,000 per bed
cap was not adjusted for inflation and the allowed cost was
approaching $280 million. The $240 million deposit to the
construction fund was smaller than what would have been
permitted had the department been allowed a larger annual
lease payment.
Mr. Mitchell furthered that on December 21, 2008, the
underwriter contacted Franklin Funds, who was willing to
offer $60 million on the bonds as an anchor tenant.
Subsequently, the department was able to fill out an order
book and successfully place the bonds. The bonds have a
true interest cost approaching 6 percent. He admitted the
percentage was high, and was more than would be expected to
be paid if it was a state general obligation bond, but that
it was relative to the AAA scales of 2008. He explained
that 2008 was a troubling time and that the investor had to
look at the Mat-Su lease revenue bond page-by-page to
understand that the state was ultimately responsible.
3:52:38 PM
Mr. Mitchell relayed that the bonds were refinanceable, but
had a 10 year call provision, which meant refinancing could
not occur within the first 10 years of the loan. After the
10th year of issuance, the last 15 years of the loan could
be refinanced. Currently, there was no ability to refinance
because of the negative carry-on the escrow to the call-
date on an advance refunding basis.
3:53:17 PM
Co-Chair Hoffman wondered how much would be paid on the
bonds in the end. Mr. Mitchell replied $442,172,506.88. He
added that the bonds were sold for a slight discount, so
less than the par amount was received.
Ms. Houston continued with Slide 10.
•April 2010 - DOC formulates a three pronged strategy
to reduce the annual fees for the water/waste water
facility. (detail of strategy on next slide)
Ms. Houston discussed slide 11: "Three-Pronged Strategy.":
1.) Value Engineering of the water and waste water
facility. These efforts have resulted in cost
reductions of approximately $2,000,000.
3:54:48 PM
Co-Chair Stedman asked how value engineering was defined.
Mr. Stark replied that value engineering meant the cost
savings through the construction process. Under the
original request for proposal, Valley Utilities had
proposed to construct the entire water/wastewater facility
for $27 million. He added the project was a "design build",
which was a method to deliver a project in which the design
and construction services are contracted by a single
entity.
3:55:51 PM
Ms. Houston continued to discuss slide 11:
2.) Use of alternative funding sources. The DOC and
Valley Utilities agreed to break the project into four
segments. One of the segments was funded by DOC from
existing appropriations; one segment was incorporated
into the prison itself and funded from surplus
proceeds from Mat-Su Borough's prison bonds; a third
segment from Valley Utilities equity contributions;
leaving only the wastewater treatment plant to be
financed. The amount financed will be about ½ of the
original estimate.
Segment Pay Estimate Funding
Schedule Source
Costs
Pipeline
$1,693,477.00 DOC Existing
Approp. FY10
GF
Water
$5,109,130.28 GCCC Bonds
Well Field
$1,447,842.04 Valley
Utilities
Equity
Contributions
Waste Water
$14,264,367.5AIDEA
8
3.) Seek alternative funding sources to reduce cost of
debt service. In addition to the private placement of
the sale, several alternatives were evaluated
including direct appropriation.
Co-Chair Stedman wondered if the equity contribution had
been cash. Ms. Houston believed that it was a loan from
Wells Fargo that Valley Utilities made directly. Mr. Stark
furthered that Valley Utilities contributed $2 million into
the project. The remaining construction financing was
coming from Wells Fargo. Essentially, AIDEA was providing
"take-out" financing from Wells Fargo. The AIDEA interest
rate was at a lower rate than the Wells Fargo financing,
and AIDEA was borrowing from Wells Fargo on a quarterly
basis as construction proceeded. Wells Fargo was providing
the expertise on evaluating the percent completion of
construction and determining the proper amount of the
draws.
3:57:49 PM
Ms. Houston displayed slide 12: "History of Goose Creek
Correctional Center Continued.":
•April 2010 - GCCC Project Committee authorized the
use of up to $5,400,000 in GCCC contingency fund for
construction of the water/waste water treatment plant.
•October 2010 - Valley Utilities requested permission
to proceed with the private placement bond sale at a
total interest cost between 8-9%. DOC rejected this
proposal and began exploring financing alternatives
through Department of Environmental Conservation and
ultimately AIDEA in an effort to reduce the State's
future debt services component of operating costs.
•December 2010 - AIDEA Board approved financing.
•December 2010 - AIDEA sold AA-rated bonds publically
that achieved a total interest rate of 5.13%. The
bonds are supported by a general obligation pledge of
AIDEA rather than the State's credit. By acting
expeditiously, AIDEA achieved an interest rate that is
approximately 1 to 1.5% lower than it would be in the
market of late-January 2011.
3:57:34 PM
Co-Chair Hoffman referred to Slide 12, and asked what the
justification was for the tax-exempt bonds. Ms. Houston
believed that the tax-exempt bonds were a result of the
American Recovery and Re-investment Act (ARRA).
Co-Chair Hoffman asked if the tax-exempt status was the
result of Valley Utilities providing service to a state
agency.
TED LEONARD, EXECUTIVE DIRECTOR, ALASKA INDUSTRIAL
DEVELOPMENT AND EXPORT AUTHORITY (via teleconference),
replied that the bond would have been tax-exempt if the
Internal Revenue Service code requirements were met for a
"project of this type".
Co-Chair Hoffman asked if a "project of this type" meant
building a line to a state correctional facility. Mr.
Leonard clarified that it meant that the money was funding
a utility that was providing services to a state operation.
4:00:48 PM
BRIAN BJORKQUIST, SENIOR ATTORNEY GENERAL, DEPARTMENT OF
LAW (via teleconference), added that the bonds were issued
as tax-exempt/private activity bonds. Under the federal tax
code, the ability to issue bonds on that basis ended at the
end of 2010. He did not know if the tax-exempt status had
been based on the utility providing to a state agency. He
said he would consult bond council and provide an answer to
the committee.
Co-Chair Hoffman requested that the attorney general and
the bond council clarify whether the bonds would retain
tax-exempt status if the utility were to be used for
residential purposes.
4:02:37 PM
Mr. Bjorkquist concluded that as "exempt facility bonds",
the bonds would be tax-exempt whether they were issued in
2010 or 2011. He clarified that the advantage of issuing
before the end of 2010 was based on the alternative minimum
tax code (AMT). Under ARRA, there were exemptions from AMT
which lowered the cost of funding by 150 basis points. The
state saved approximately $1.5 million in interest cost by
the issuance of the bonds before the end on 2010.
4:04:05 PM
Ms. Houston discussed Slide 13, "Department of Corrections
In-State vs. Out-of-State Bed Cost Comparison," which
illustrated the bed cost comparison through FY2014. She
explained that the daily cost of care for an inmate was
$136.44 per day. The figure included health care and
rehabilitation programs. The numbers reflected in the graph
on Slide 13 stripped away all expenses but the per bed
cost.
4:04:32 PM
Co-Chair Stedman requested that graph be enhanced to
reflect the other costs in order to provide a holistic view
of the cost comparison. Ms. Houston replied that the
numbers would be revealed as the presentation moved
forward.
Co-Chair Stedman remarked that that the in-state bed cost
was rising faster than the bed cost out-of-state. He
wondered how the other cost compared when added together.
KEVIN WORLEY, INTERNAL AUDITOR, DEPARTMENT OF CORRECTIONS,
shared that DOC had been asked to compare the out-of-state
versus the cost of continuing the Goose Creek project. The
department would be phasing out the out-of-state cost and
adding in the Goose Creek cost. The Department of Revenue
had provided the 2003-2010 numbers on the rate of return to
DOC. He discussed Slide 15: "Net Present Value -
Qualification and Assumptions.":
•Rate of returns for FY 2011 - 2014 are assumed to be
3%.
•Assumes capital funding was used in full the year of
appropriation.
•NPV - cost of out-of-state (OOS) is estimated in
order to calculate; however, the DOC will revisit it's
population management plan if OOS is used for FY 2012
- 2014. Assumes population for OOS will remain at
1,050 as it is uncertain what DOC will have to do in
order to house inmates in excess of 1,050.
•State will continue all bond payments.
•Assumes no additional changes to OOS contract.
•This is subject to change in the event the population
management plan changes or there are significant
changes to the prison inmate population.
•For NPV calculation, assumes that if GCCC is not
opened, OOS inmate population will continue to
increase. DOC will revisit it's population management
plan.
4:06:14 PM
Mr. Worley displayed Slide 16: "Operating and Capital
Expenditures, DOC Costs - GCCC Phase-in." The first line
item on the Operating Budget description chart was the debt
service cost beginning in FY 09. The second item
illustrated the out-of-state cost from FY 03-FY 14. He
pointed out to the committee that the cost was shown to go
down in FY 14, but at the same time DOC would be phasing in
GCCC. Line item three was the system expansion cost from FY
08 through FY 14. The last operating item was the phasing
in of GCCC following the population management program. The
lower half of the chart contained the Capital Budget items.
The first item was the future capital request of $25.2 in
FY 13. Four other capital projects items were listed, two
related to the Department of Commerce, Community and
Economic Development, and two to DOR. The total annual cost
by fiscal year was presented on the bottom line. Costs for
FY 13 and FY 14 were subject to change based on the prison
population management plan.
4:08:06 PM
Co-Chair Stedman wondered about the pre-Goose Creek
operating cost of approximately $35 million for FY 09. He
remarked that there was a jump from $35 million in
operating costs if FY 09, to $71 million in FY 14. Mr.
Worley replied that in order to figure out the operating
costs the debt service cost had been added as the first
line item.
Co-Chair Stedman suggested subtracting the debt service
from the total operating cost. He felt this would give a
clearer picture of the impact to the state of opening GCCC.
He noted that the increase in operating cost from FY 08 to
FY 14 was $50 million. Mr. Worley agreed that the FY 14
operating cost was projected at $71 million.
Co-Chair Stedman reiterated that according to Slide 16,
housing prisoners in FY 08 cost the state approximately $20
million, and would jump to $71 million in FY 14. He noted
that the department did not have significant capital costs
until FY 08. He queried the plans for the $25.2 million
request listed for FY 13. Ms. Houston stated that the
request represented the full furniture, fixtures,
equipment, capital list start-up items, and one-time items.
4:11:04 PM
Co-Chair Stedman wondered if the numbers were located in SB
65 that reflected the $20 million to $71 million increase.
Mr. Worley responded that if the debt service cost were
removed from the projected figure for running GCCC, the
total operating cost for FY 14 would be $54.2 million.
Co-Chair Stedman probed what the cost to the state would be
for FY 14, if the facility at Goose Creek was mothballed,
and the prisoners remained out-of-state. Mr. Stark replied
that currently the 950 out-of-state inmates cost Alaska $22
million to $24 million. Ms. Houston added that calculations
had been run in the past on the cost of mothballing GCCC.
The $22 million figure would include the debt service,
minor utilities, maintenance staff, and private security.
Co-Chair Stedman stressed that the total cost to mothball
the facility was substantially lower than the projected
operating cost of the facility.
4:14:19 PM
Mr. Worley discussed Slide 17: "Operating and Capital
Expenditures, DOC Costs-GCCC Phase-in.", which was a
graphical depiction of the information on Slide 16.
4:15:51 PM
Co-Chair Stedman asked for an explanation of Slide 18. Mr.
Worley replied that slide 18: "Net Present Value
(NPV)Comparison of GCCC Phase-in vs. Continuation of Out-of
State":
•NPV of GCCC phase-in = $317.0
•NPV of Out-of-State = $177.3
Timeframe comparison is FY03 - FY14.
Mr. Worley explained that the cash outlay of each fiscal
year had been taken into account, as well as the rate of
return, from FY 03 to FY 10. A rate of return of 3 percent
had been assumed through FY 14.
4:17:06 PM
Co-Chair Stedman requested further explanation of the
difference between the two projections. Mr. Worley replied
that the cost differences were the result of the debt
services the state would pay, the GCCC start-up from FY 10
to FY 14; both operating and capital requests. He added
that the NPV of $177.3 included the out-of-state costs
starting at $12.1 and rising to $24 million by FY 14.
Co-Chair Stedman understood that the estimated cost to run
GCCC was $27 million per year, it would cost the state
approximately $400 million over 20 years. He thought that
the numbers on Slide 18 underestimated the actual impact of
the cost to the state. Mr. Worley agreed. He stressed that
the total value on Slide 16 for the timeframe listed was
roughly $427 million compared to the total cost of $226.6
million for keeping inmates out-of-state.
Co-Chair Stedman offered that GCCC was an expensive project
for the state.
4:19:54 PM
Mr. Mitchell discussed slide 19: "2008 Matanuska-Susitna
Borough Goose Creek Bonds Security and Legal Structure.":
· Lease purchase agreement and ground lease
executed in which the State leases the facility
from the Borough in exchange for annual lease
payments and "additional rent" equal to debt
service on the bonds plus operations and
maintenance costs
· -State will own the facility once the bonds are
retired and lease agreement terminated
· -The Land on which the facility is constructed is
currently owned by the Borough
· Right to receive lease payments assigned to
trustee who acts on behalf on bond purchasers
· -State pays appropriated funds directly to the
trustee five days prior to each payment date
· Lease agreement represents an absolute net
lease/triple net lease in which the State is
responsible for all rent payments, additional
rent and operations and maintenance
· Funds for repayment of bonds are appropriated
annually by the Legislature - principal payments
made to the State are structured semi-annually
· Agreements are subject to early termination due
to an event of non-appropriation or event of
default
· -Should the Legislature fail to appropriate
funds, the State may vacate the facility and be
released of its obligations to make all future
payments. The trustee would pursue remedies under
the lease agreement including attempting to re-
let the property. The State's credit rating would
be downgraded.
Mr. Mitchell reiterated that the AIDEA transaction had been
subject to the AMT because Valley Utilities was a private
operator. Normally, water systems that were publicly owned
were not subject to the AMT. There was a holiday on the AMT
due to ARRA that AIDEA took advantage of which had resulted
in a savings of 1.5 percent.
4:22:00 PM
Mr. Mitchell displayed Slide 20: "Financing Structure.":
· Par amount of $244.3 million of Lease Revenue
Bonds priced December 19, 2008
· Twenty-five year level debt service with a final
maturity in FY 2033
· -Annual lease payment approximately $17.8 million
per year
· All in TIC 5.955391%
· Cost of issuance $400,000, underwriting cost
$1,172,847.70 ($4.80 per bond), cost of bond
insurance $1,105,431.27, net original issue
discount $1,533,570.95, resulting in project fund
deposit of $240,073,150.08
· Yields 35 to 100 basis points over Municipal
Market Data Aaa scale of 12/19/2010
· Standard 10-year call feature
Mr. Mitchell relayed that the 2010 general obligation bonds
sold in the first week of December 2010 were on top of the
AAA scale. The state was upgraded to AAA prior to the
transaction of the sale, which allowed the bonds to be sold
into a difficult market. The state of Alaska was
responsible for the lease revenue bonds.
4:23:35 PM
Co-Chair Stedman assumed that the department would make a
capital request for $25 million for FY 13. Over the last
five years in the supplemental budget the committee had
added approximately $49 million, an average of $9.8 million
per year. He stressed that in-depth discussions needed to
occur in committee concerning DOC expenses. He expressed
the desire to work with DOC to lower the supplemental
budget numbers.
4:25:07 PM
Senator Ellis directed attention to Slide 16. He had
understood during sub-committee meetings that the furniture
and fixtures planned for the facility would come out of the
contingency bond funds. Ms. Houston replied that DOC hoped
to use up to $5 million of the contingency bonds proceeds
from the Mat-Su Borough. She said that DOC was looking to
request $1 million for telecommunications infrastructure
and $4.5 million for inmate and administrative staff
furniture.
Co-Chair Stedman requested detailed reports on the
construction contingency and interest reserve accounts.
4:26:33 PM
Co-Chair Hoffman wondered if the costs were even eligible.
He contended that the costs should have been incorporated
into the per day costs when the bonds were sold. He
requested a detailed breakdown of the $11,600 per bed cost.
Ms. Houston agreed to provide the information.
4:27:32 PM
Senator Ellis felt that due to the remote location of the
facility, the state was being held up for greater costs
than was anticipated. He contended that he would have been
reluctant to co-sponsor a bill that left the choosing of
the facility location to a single community. He wondered if
the remote location would result in the state incurring
extra cost for transportation to medical facilities. He
recognized the plan for a medical clinic on site, but
expressed concern about major medical needs. Commissioner
Schmidt agreed to provide that the cost estimations of
transportation for medical purposes.
Co-Chair Stedman stressed that the committee hoped to
achieve a comprehensive holistic view of the corrections
costs to the state.
Co-Chair Hoffman made a final request for information about
the developmental costs of road access. Co-Chair Stedman
requested information on design, engineering, road size, et
al.
Co-Chair Stedman thanked the testifiers and discussed
housekeeping.
4:29:15 PM
ADJOURNMENT
The meeting was adjourned at 4:32 PM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Goose Creek Presentation - SFIN - 02-24-11.pdf |
SFIN 2/24/2011 2:30:00 PM |
Goose Creek Presentation |